Principles of Accounting II
Chapter 19 - Common Transactions and Journal Entries for Manufacturers
Transactions relating to manufactured goods:
• Purchase Raw Materials
• Apply Raw Materials to Goods in Process
• Pay wages for Direct Labor
• Apply Direct Labor to Goods in Process
• Apply Overhead to Goods in Process
• Transfer completed goods from Goods in Process to Finished Goods
• Sell Finished Goods
Common Journal Entries Relating to Product Costs for Manufacturing Companies
•
Purchase Raw Materials
When raw materials are purchased, you recognize an increase in an asset account by debiting Raw
Materials Inventory. Credit Accounts Payable (if purchased on account) or Cash (if purchased for cash).
The source document for this transaction is the purchase invoice.
Raw Materials Inventory
Accounts Payable
•
Apply Raw Materials
Raw materials are applied to goods in process. As raw materials are applied, the raw materials inventory
decreases and the goods in process inventory increases by the amount of raw materials applied. The
source document for this transaction is the Materials Requisition.
Goods in Process Inventory
Raw Materials Inventory
•
Incur Labor Costs
Factory labor costs are generally recorded when the paychecks are written. An exception would be when
an adjusting entry is required at the end of an accounting period. Factory labor, whether direct or indirect,
is a product cost and not a period cost. The cost of all factory labor is accrued in a temporary account
called Factory Payroll (as opposed to using the Wages Expense account which would indicate a period
cost). The source document for this transaction is the employee time card.
Factory Payroll
Cash
•
Apply Factory Payroll – Direct Labor
The Factory Payroll account includes costs for both direct labor and indirect labor. Direct Labor is applied
to Goods in Process. The source document for this transaction is the time ticket.
Goods in Process Inventory
Factory Payroll
•
Apply Factory Payroll –Indirect Labor
Indirect Labor is absorbed into Factory Overhead since the indirect labor cannot be easily traced to a
specific product. The source document for this transaction is the time ticket.
Factory Overhead
Factory Payroll
•
Incur Various Indirect Product Costs
Any indirect product cost (such as utilities, machinery depreciation, factory supplies and indirect materials)
are absorbed into Factory Overhead. (Note: indirect labor was closed to Factory Overhead in a separate
entry). To journalize these costs, Factory Overhead is debited for the total of indirect expenses and the
appropriate account is credited based on the expense being incurred. (NOTE: if an item is being paid for
as part of this transaction, Cash would be credited).
Factory Overhead
Utilities Payable
Accumulated Depreciation
Supplies
Raw Materials
•
Apply Overhead to Goods in Process
In the previous entries involving overhead, the overhead cost was accumulated by not assigned to any
goods in process. Overhead is applied to goods in process using the predetermined overhead
application rate. Debit Goods in Process and credit Factory Overhead for the amount of applicable
overhead.
Goods in Process
Factory Overhead
•
Transfer Completed Goods in Process to Finished Goods
As goods in process are completed, their cost should be transferred out of Goods in Process and into
Finished Goods inventory. Since the asset Finished Goods is increasing, this account is debited. The
inventory asset Goods in Process is decreasing, therefore this account should be credited.
Finished Goods
Goods in Process
•
Sell Finished Goods
Recall from Chapter 5 that when goods are sold in a perpetual inventory system, two journal entries are
required. The first entry shown below records the sale of the goods at the negotiated sales price (Cash
would be debited if cash were received for the sale). Secondly, when finished goods are sold, the Cost of
Goods Sold account is debited and the inventory asset Finished Goods is credited. The cost of finished
goods sold is deducted from Sales on the income statement to determine gross profit. Any unsold finished
goods remain as an asset on the balance sheet.
Accounts Receivable
Sales
Cost of Goods Sold
Finished Goods
•
Apply Over- or Under-Applied Overhead
Since overhead is based on an estimate, the overhead account will almost always have a balance at the
end of the accounting period. If the overhead account has a debit balance, overhead has been
underapplied. If the overhead account has a credit balance, overhead has been overapplied. Assuming
the balance is immaterial, close the balance in the overhead account to Cost of Goods Sold.
Underapplied:
Cost of Goods Sold
Factory Overhead
Overapplied:
Factory Overhead
Cost of Goods Sold